Watchdog Puts Auditors on High Alert

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The Public Company Accounting Oversight Board is warning auditors to take special care in the current down market, scouring for places where management manipulation or mistakes will be more likely than ever.

“As is the case in any audit, but even more important in the current environment, adequately assessing and appropriately responding to the risk of misstatement of the financial statements is key,” said PCAOB chairman Mark Olson today at an American Institute of Certified Public Accountants conference.

On Friday, the audit firms’ regulator published a practice alert highlighting several issues auditors should be aware of as they begin their 2008 year-end audits. Olson said the top problem areas will be reviews of companies’ fair-value measurements, their ability to remain a going concern, and their other-than-temporary impairment recordings (the PCAOB suggests these numbers could last longer than companies imply).

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The alert also advises auditors to pay particular attention to the adequacy of disclosures and accounting estimates, such as allowance amounts assigned to uncollectible receivables and deferred tax assets.

The board has issued only two other alerts for auditors on timely topics, the first discussed the timing of stock options and the in the other was guidance for evaluating fair-value estimates. The latest alert comes in response to the first recession in the board’s six-year existence.

To be sure, high pressures during a downturn raise the possibility that a company’s employees will take fraudulent steps to meet shareholders’ and board’s expectations, the PCAOB notes. Along with outside forces having an effect on companies of all industries — not just financial services firms that were first hit by the subprime mortgage meltdown and subsequent credit crunch — internal changes could also cause problems. For instance, the board’s alert turns auditors’ attention toward internal controls over financial reporting, in light of the fact that large restructuring moves — as in, fewer employees — could damper companies’ abilities to monitor and keep track of their data.

PCAOB officials themselves expect to do more work in the coming months when their inspectors begin their review of the audit firms’ 2008 work. The board is asking the Securities and Exchange Commission for a 9-percent increase to its $144.6-million budget, partly because of the “more complex issues” that are sure to arise out of the U.S. economic problems, Olson said two weeks ago.